No Shotgun Wedding for Ford and GM
It would make about as much sense as Microsoft (MSFT) and Apple Computer (AAPL) merging. Or the New York Yankees and the Boston Red Sox.
Executives at Ford Motor (F) and General Motors (GM) whispered on Monday, Sept. 18, that a report in trade publication Automotive News was on the money—that the chief financial officers of the two ailing auto giants did meet recently to discuss an alliance of some kind. It did happen. Those same executives, though, quickly added that the two sobered up, retreated to their offices, and agreed that nothing would come of it.
GM officially declined to confirm or deny any the discussions with Ford. "As we have often said, GM officials routinely discuss issues of mutual interest with other automakers. As a policy, we do not confirm or comment publicly on those private discussions, which in many cases never lead anywhere," said Steven Harris, GM's vice-president for global communications.
The meeting, say executives familiar with the chain of events, took place in July following a session between GM Chairman and CEO G. Richard Wagoner Jr. and Renault/Nissan (NSANY) CEO Carlos Ghosn to discuss possibilities of an alliance between the two companies. The GM-Renault talks were prompted by GM dissident shareholder, billionaire Kirk Kerkorian, who publicly called for a meeting between the two companies after he and adviser Jerome York discerned interest in a deal on the part of Ghosn. Wagoner, looking for alternatives to a Renault-Nissan alliance, reportedly spoke with Ford Chairman William Clay Ford Jr. about their respective CFOs meeting to discuss options.
"I always thought this would come up sooner or later in a distressed environment," says John Casesa, principal of Casesa Shapiro Group and former auto industry analyst at Merrill Lynch (MER). "Since Detroit is resistant to outsiders, the two companies may be more interested in cooperating with each other than a foreign-owned company like Renault-Nissan."
Though it's hard to imagine a combination of Ford and GM ever adding up to more than the sum of their parts, there is precedent for the two companies cooperating. The two recently developed a six-speed transmission, something seen as a commodity by the two companies, that is now available in both companies' passenger cars. "There are other places like that the two could cooperate to their mutual advantage, but it can be difficult to decide where the lines of competition end," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.
A LOT IN COMMON.
Ford and GM both have depressed stock valuations, dented credit ratings, and falling market share. GM lost more than $10 billion last year. Ford will lose several billion this year. Both companies have been undertaking massive restructurings and have announced headcount reductions in excess of 70,000. Ford's and GM's shares both closed lower in trading on Sept. 18 after the alliance talks were made public.
While cooperative alliances here and there—transmissions and engine blocks for small cars, for example—could make sense, a full-blown combination of the two companies would be a colossal undertaking. And it would probably not meet regulatory resistance, given the declines of their respective market shares relative to the surging Japanese and Korean automakers, such as Toyota (TM), Honda (HMC), and Hyundai. GM and Ford together control 16 brands in the U.S., with GM adding three more overseas. Both companies have been reluctant to part with any of them, even in the face of overwhelming arguments that neither has the wherewithal to manage so many.
Casesa doesn't think a merger or even an alliance makes much sense. The two companies have too many like models and their brands chase the same customers. They just don't bring each other much that the other doesn't have. "I don't think it would make a lot of sense strategically because they have enormous overlap in their buyer bases," he says.
PLENTY OF OVERLAP.
GM is ahead of Ford in terms of technology and design that an objective rationalization of the two companies would consign most of Ford, say analysts, to the auto industry's attic of dead brands and products. No need for Lincoln when Cadillac is further along in competing with Europeans. Ford's Mercury brand would instantly be killed. Ditto Buick. Chevy's car and sport-utility vehicle portfolio is more competitive than Ford's.
But Ford trucks are still the gold standard for pickups. By gaining Ford's Volvo unit, GM could finally kill Saab, though. Land Rover and Jaguar? The best idea is to sell 51% to private equity investors or another car company, and let the new owners get out of manufacturing in Britain, where the cost of building vehicles regularly devours any possible profits.
Like Casesa, Maryann Keller doesn't think GM and Ford offer each other much. "There's no point to it," says Keller, who sits on the board of public dealer chain of Medford (Ore.)-based Lithia Motors (LAD) and Dollar/Thrifty Automotive Group (DTG). "So now you'd have one giant company with excess production in pickups and SUVs."
But all of this is conjecture and the equivalent of two Rotisserie Baseball League owners jawboning about a trade of Yankee Derek Jeter for Seattle Mariner Ichiro Suzuki. The complexity of working out the deal with respective managements, the United Auto Workers, the European Union, the German labor union, and retirees whose health-care benefits would surely be on the block—not to mention potential federal antitrust opposition— defies the sensibilities of the even the best business school minds.
If the two companies can find other small ways to hook up without violating the rules of competition, like putting more combined resources into hybrid and fuel-cell technology so they aren't duplicating efforts, then we'll all benefit. But since each company doesn't seem to be able to rationalize its manufacturing base or its brand portfolios on its own, it doesn't seem likely that they would be able to do it together. If they did try, load up on shares of Toyota, Honda, and Hyundai.